Last weekend, at an event somewhere in Marina, Lagos, I was chatting with some artificial intelligence enthusiasts when one of us in the group, a founder, pitched the idea of selling fashion accessories online—mostly clothing and shoes with same-day delivery options. He wanted us to give feedback on his idea.
Two interesting people were in that group, following the founder’s pitch. They were Nicolas Eyssallenne, an energy, AI and logistics expert; and another guy I’ll simply call Mark, who is an ideator for startups and self-described lover of Jumia products. Mark asked to stay anon for this piece.
Jumia was at an all-time high of $57.55 per share in 2021. Today’s it closer to $4 | Chart by Mobolaji Adebayo, TC Insights
As the founder shared his fashion accessories ecommerce idea with our little group, everyone waited for the hook: How are you going to make money off this?
For anyone who has seen Jumia’s latest second-quarter financials, the problem the ecommerce giant is facing is dwindling revenue and more losses. In Q2 2023, its revenue was down 15.4%, with a drop in all of its major earning indices—commissions, fulfilment, market and advertising, and value-added services (VAS). It also lost one million customers as gross merchandise value dropped by 25.4%. In a 2022 report by the firm to the United States Securities and Exchange Commission, the ecommerce giant reveals that the firm has not been profitable in the long run. As of December 31, 2022, the firm states that it had accumulated losses of $2 billion, a bleeding that’s been consistent since 2020, the year of the pandemic.
In the pitch conversation I listened to at that event in Marina, the consistent question Eyssallenne kept asking was how much the founder was going to charge as commissions, and whether he would be able to make good with his promise of same-day deliveries.
In rethinking a solution to the ecommerce situation Jumia is facing, Mark was of the opinion that the ecommerce company was suffering from low margins and a high cost of operations. He painted a scenario where a USB charger costs ₦8,000, is shipped from China and stored in a warehouse in Nigeria. “How much money do you think the seller makes off that, and how much money do you think Jumia makes off that? What is the delivery cost?” he asked me.
The crux of Mark’s argument is that if a product which is not manufactured by you is sold on a platform, how much does the seller charge to be able to make a profit? How much does the ecommerce platform charge? How much do they make in delivering that same item to you? This situation can easily mean that Jumia sellers are not earning much from what they sell on the platform.
Elsewhere, Amazon, Alibaba and the Indonesian ecommerce markets demonstrate use cases outside of the continent. Indonesia’s growth has been attributed to strong economic development, internet access and penetration, and mobile phone ownership. All these are not available in many parts of Africa. Already, many countries on the continent battle extreme poverty, political instability, not enough smartphones, poor infrastructure and internet facilities. What many readers may not recognise is that both Amazon and Alibaba were long established before Jumia. While longevity may not translate to profitability, it can if the founder is bullish on learning while burning money.
Amazon’s history of being an ecommerce giant started with it being a bookstore, providing books and publishing services. An underreported story is how Amazon suffered losses in 2014 as the firm set aside profitability and focused furiously on growth, spending all its money on the success stories we see today: Amazon Prime and Amazon Web Services (AWS). Four years later, all of that investment began to slowly pay off. Amazon’s foray into the grocery delivery business via the acquisition of Whole Foods did great numbers on its revenue in 2018. Added to that was revenue from AWS and Amazon Prime membership subscriptions. In Q1 2018, AWS’s revenue rose 49% to $5.44 billion from what was recorded a year before. Same for revenue from subscription services, which went up 60% to $3.1 billion. In September 2018, Amazon became the second US public company to cross the $1 trillion valuation threshold after Apple. Similarly, its investment in faster shipping drove its revenues to $87 billion in Q9 2019 from $72.4 billion the year before.
As at 2021, Amazon has generated $24.8 billion in operating profits, with AWS contributing a significant percentage—74% ($18.5 billion)—to that success. AWS’s growth cannot be ignored as the biggest contributor to its net income. So, maybe what Jumia needs is more money to burn and more time to develop other verticals creatively like the Amazon use case.
However, time and money are what Jumia doesn’t have—especially with a liquidity position of $166.3 million, as at June 2023, and a quarterly cash utilisation of $38 million in the quarter. At that burn rate, Jumia could run out of cash within 13 months, according to this analyst.
What is the future of ecommerce in Africa?
The rise of the peer-to-peer shopping model has slowly begun to displace other models. This is something Jumia’s competitor, Jiji, offers. Both Eyssallenne and Mark believe social commerce will become more popular. Bitcoin already offers peer-to-peer trading options. The rise of Whatsapp, Facebook and Instagram may cement that ceiling. According to Deloitte, roughly 4.6 billion people (58% of the population) are active social media users, spending an average of two and a half hours per day on these channels.
This makes it easy for both buyer and seller to meet on the internet to exchange goods and services. This study says 1 in 4 Americans check their phones less than a minute after getting up each morning. This behaviour can increase the chances of customers shopping and, by extension, make them buy things impulsively. This also means one could have purchased an item even before having breakfast.
Social commerce impacts the shopping experience by thriving on trends or the popularity of a product. Platforms such as X (formerly Twitter) can help one scale and return massive profits with just the right keywords or trend. For businesses, the ease of setting up a virtual shop and activating seamless pay-out options make social commerce more appealing. With the rise of influencers, livestream commerce, AI Chatbots and Facebook Marketplace, ecommerce trends will continue to witness changes in the not-so-distant future. Already, Deloitte Global predicts that the market for social commerce will surpass $1 trillion globally in 2023.
China has begun to latch onto this trend as $132 billion worth of goods in 2021 was purchased through live-stream shopping. Jumia may want to include social commerce as its strategy. However, it cut its sales and advertising spend by 74% in Q2 2023. Would the company want to risk more spending after it has spent the past four years cutting costs on the path to profitability?
In the end, social commerce does its part to seek out customers where they actually are—on instant messaging and photo sharing apps. It is a more personalised mode of shopping that will only gain more traction in the new world of ecommerce.
Senior Reporter, TechCabal.
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